Friday, June 18, 2010

The euro crisisAt last, more transparency in Europe's banks

The euro crisisAt last, more transparency in Europe's banks

Jun 17th 2010, 18:12 by Charlemagne

<!--[endif]--> IT IS buried in article 14 of an uninspiring set of summit conclusions, but the 27 leaders of the European Union took a useful and important decision today, namely to publish the results of stress tests on Europe’s 25 largest banks.

For all their populist attacks on “immorality” of financial markets and vows to rein in “casino capitalism”, their sensible decision—taken at a one day meeting in Brussels—was prompted by market pressure. In short, for all their faults, markets have once again provided the only reliable source of discipline and rigour in this whole euro crisis.

It was the same in February, when EU leaders gathered in Brussels to wag their fingers and vow to stand by countries in the eurozone, in a bid to halt market attacks on Greece. However, their refusal to spell out what they meant meant that within days markets had called their bluff. Four summits later, the EU agreed a €750 billion eurozone defence mechanism. Markets can and do get things wrong, and rush about in herds. But no other force has been able to make EU politicians sit down and agree what they need to do to save the single currency.

The idea of making public these tests—that measure the ability of banks to survive various horrid economic scenarios—came from Spain. Spanish banking regulators and government officials have been pushing for publishing stress test data for some days, arguing that international markets were taking too gloomy a view of Spanish banks, and that a dose of transparency would act as a positive, calming surprise.

The Germans were more reticent, with the boss of Deutsche Bank, Josef Ackermann, saying last week that he supported publication of stress tests in principle, but that going public would be “very, very dangerous” if mechanisms to support European banks were not in place beforehand. Unsurprisingly, Germany’s public sector banking association, is still opposed: it represents the regionally-owned Landesbanken where many of Germany’s scariest financial skeletons lurk.

The Spanish forced the pace, however. Officials here in Brussels say that only two Spanish banking groups, Santander and BBVA, are big enough to make the 25 covered by the summit conclusions.

But the governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, a man of good sense who has been at the forefront of pushing for structural reforms (making him few friends in the Spanish government), announced yesterday that stress tests would be published covering all Spanish banks. That includes tests on the troublesome cajas—credit co-operatives that are often controlled by powerful local politicians and which have been resisting pressure from Madrid to merge and restructure.The tests will cover: “not only for what would currently seem to be the most reasonable scenarios, but also for complex growth scenarios in the near future”, he said. If by the end of June, any institutions are still resisting restructuring and recapitalisation by the FROB (Fund for the Orderly Restructuring of the Banking Sector), then the central bank “will act”, said Mr Fernandez Ordóñez. That is no idle threat: the FROB mechanism allows the central bank to take over recalcitrant banks, as happened with the church-run CajaSur the other day.

With luck, markets will reward Spain for this transparency. The prospect that openness will help Spain get ahead of the markets has certainly had a good effect on the Spanish prime minister, José Luis Rodríguez Zapatero. He began this crisis by hinting that the dark forces of an Anglo-Saxon conspiracy were picking on Spain to destroy the euro.

Tonight in Brussels, Mr Zapatero was still grumbling about unfounded rumours (and frankly, he has a point), but also arguing: "There is nothing better than transparency to demonstrate solvency.”

The European Commission president, José Manuel Barroso, jumped on the chance offered by the new mood of openness to push for a proper cleaning out of the horrors that still lurk in corners of EU banks. “This should reassure investors by either lifting unfounded suspicion or by dealing with the remaining problems that may exist,” he said.

You will never persuade most European politicians to admit it, but they are finally doing the right thing, and it is down to those hated market forces.